Economic Overview - In the first half of 2025, China's current account surplus increased by 186% year-on-year to $294.1 billion, marking a historical high for the same period[2] - The current account surplus accounted for 3.2% of GDP, up 2.0 percentage points year-on-year, remaining within the internationally recognized range of ±4%[2] Trade Performance - The goods trade surplus grew by 58% year-on-year to $456.7 billion, while customs-calibrated goods trade surplus increased by 34% to $584.5 billion, resulting in a significant gap of $127.8 billion between the two measures[3] - China's goods exports accounted for 14.2% of global share, a 0.1 percentage point increase year-on-year, achieving a historical high for the same period[4] Capital Account Dynamics - The capital account deficit rose by 212% year-on-year to $334.8 billion, primarily due to a shift from a surplus of $5.2 billion in the previous year to a deficit of $288.2 billion in short-term capital[12] - Net outflow of domestic investment increased by 179.4 billion to $385.9 billion, while foreign investment inflow remained relatively stable, decreasing by $26.1 billion to $67.7 billion[12] Foreign Investment Trends - Net outflow of foreign debt and equity investments increased, with net outflow of securities investment rising from $96.9 billion to $154.7 billion[16] - Foreign direct investment net inflow turned from a net outflow of $3.9 billion in the previous year to a net inflow of $31.9 billion[23] Foreign Exchange Reserves - Foreign exchange reserves increased by $115.1 billion to $3.32 trillion, the highest level since 2016, driven by the expanded current account surplus and reduced direct investment deficit[36] - The valuation effect from currency and asset price changes contributed significantly to the increase in foreign exchange reserves[36] Outlook on Debt Position - The increase in domestic capital outflow has driven the private sector's net foreign position to turn positive, indicating a potential transition towards becoming a mature creditor nation[38] - As of June 2025, the private sector's net foreign assets reached $181.9 billion, suggesting that 2025 may mark the beginning of China's journey towards becoming a mature creditor nation[41]

Core Insights - The article discusses the recent trends in the foreign exchange market, particularly focusing on the RMB/USD exchange rate and the behavior of banks in managing foreign exchange positions amid changing market conditions [1][12]. Exchange Rate Trends - Since March 2025, the RMB has shown an upward trend against the USD, with banks experiencing a continuous surplus in foreign exchange settlements for six months, the longest period since August 2021 [1]. - The average exchange rate for bank settlements has increased by approximately 1.2% compared to previous periods, indicating a "buy low, sell high" strategy [14]. Historical Context of Exchange Rate Fluctuations - The article outlines six phases of RMB exchange rate trends since the 2005 reform, highlighting periods of both appreciation and depreciation, with the most recent phase starting in March 2025 showing a surplus in foreign exchange settlements despite ongoing trade tensions [2][4]. - The average settlement rates for foreign exchange have varied significantly over the years, reflecting changes in market sentiment and external economic pressures [3][4]. Market Behavior and Bank Strategies - The willingness to purchase foreign exchange has decreased, while the motivation to sell has increased, indicating a shift in market dynamics [4]. - Banks have adjusted their foreign exchange positions in response to market conditions, acting as liquidity buffers in the foreign exchange market [9][10]. Financial Positioning and Asset Management - By the end of Q1 2025, the private sector's net foreign position turned positive for the first time, indicating a significant increase in foreign financial assets [7][8]. - The article notes that banks have been increasing their foreign exchange positions, which is seen as a rational response to market conditions, rather than speculative behavior [12][14].

Core Viewpoint - The current behavior of banks in repurchasing previously "advanced" dollar shorts at the current price level is rational, especially in the context of the RMB exchange rate appreciating against the backdrop of extreme tariff pressures in 2025 [1][22]. Summary by Sections Exchange Rate Dynamics - Since March 2025, banks have experienced a continuous surplus in foreign exchange settlement and sales for six months, marking the longest period since August 2021 [1]. - The RMB exchange rate has shown a reversal trend, with the foreign exchange supply exceeding demand since March 2025, despite renewed trade frictions [2][22]. Historical Context of Foreign Exchange Supply and Demand - The foreign exchange supply and demand dynamics can be categorized into six phases since the 2005 exchange rate reform, with the most recent phase indicating a surplus in foreign exchange supply [2]. - The average settlement rate for foreign exchange has fluctuated significantly across different periods, reflecting changes in market sentiment and external pressures [4][6][7][8]. Market Behavior and Trends - The willingness to settle foreign exchange has generally decreased since July 2014, while the motivation to purchase foreign exchange has increased, indicating a shift in market behavior [8]. - The net foreign position of the private sector turned positive for the first time by the end of Q1 2025, indicating a significant increase in foreign asset allocation [12][15]. Bank's Role in Foreign Exchange Market - Banks have taken on the role of liquidity regulators in the foreign exchange market, adjusting their positions based on the supply-demand dynamics without direct intervention from the central bank [16][20]. - The behavior of banks in increasing foreign exchange positions is seen as rational, especially given the current market conditions and the need for risk management [20][22]. Recent Developments - From March to August 2025, banks recorded a cumulative surplus in foreign exchange settlement, indicating a shift in market conditions [22]. - The average purchase price of foreign exchange by banks has appreciated compared to previous periods, aligning with a strategy of "buy low, sell high" [22].

Core Viewpoint - The sustainability of the private sector's net foreign assets in China is crucial for the country to transition into a mature net creditor nation, especially as the depreciation of the RMB approaches its end [1][7]. Group 1: Changes in Private Sector's Net Foreign Position - China's private sector's net foreign position has shifted from negative to positive, with a net asset of $785 billion as of Q1 2025, marking the first positive net position since 2004 [1][9]. - The private sector's net foreign liabilities increased from $3,778 billion at the end of 2004 to a peak of $23,732 billion by mid-2015, influenced by the long-term appreciation of the RMB [2][3]. - Following the "8·11" exchange rate reform in 2015, the private sector's net foreign liabilities began to decline, reaching $11,130 billion by the end of 2016, a reduction of 53% from the peak [3]. Group 2: RMB Exchange Rate Trends - The RMB has experienced a general depreciation since early 2022, with the onshore midpoint and spot rates falling by 11.3% and 12.7% respectively by the end of 2024 [5]. - In 2025, the RMB began to appreciate against the backdrop of a weakening USD, with the dollar index dropping by 10.8% in the first half of the year [5][6]. - The exchange rate fluctuations have played a significant role in adjusting the private sector's foreign liabilities, with a negative valuation effect of $5,796 billion due to the RMB's depreciation from Q2 2022 to Q1 2025 [10]. Group 3: Implications for China's Net Creditor Status - The transition to a positive net foreign position is supported by a structural trade surplus, which has been a significant factor in maintaining stable foreign exchange reserves [9][13]. - The reduction in private sector net liabilities is attributed to increased foreign asset holdings and a decrease in foreign liabilities, with a net outflow of $11,235 billion in foreign investments [9]. - If the trend of positive net foreign assets continues, 2025 could mark the year China officially becomes a mature net creditor nation, although potential risks from trade surplus fluctuations and exchange rate volatility remain [13].